Church & Dwight Co., Inc. (NYSE:CHD) announced second quarter 2016 EPS of $0.85 per share, a 54.5% increase or a 16.4% increase on an adjusted basis over the prior year quarter exceeding the Company’s prior outlook. Driven by 3.7% organic sales growth and gross margin expansion, this equates to 17.8% currency neutral adjusted EPS growth. Organic sales growth for the global consumer business was 4.9%. Adjusted EPS results excludes both a pension settlement charge ($0.05) and an impairment charge ($0.13) associated with the Company’s investment in a joint venture in 2015.
Second quarter 2016 reported net sales increased $30.3 million or 3.6% to $877.4 million. 3.7% organic sales growth was driven by volume growth of 3.1% and 0.6% from favorable product mix and pricing.
Matthew T. Farrell, President and Chief Executive Officer, commented, “We are extremely pleased with our sales and earnings growth as our strong momentum has continued. Our first half gross margin expansion gives us flexibility with respect to our second half marketing and promotional investments. We continue to believe that innovation is the key to increasing our market share and have launched new products in many of our major categories including BATISTE, the #1 global dry shampoo, and ARM & HAMMER bi-layer and dual chamber unit dose laundry detergent.”
Second Quarter Review
Consumer Domestic reported net sales were $669.8 million, a $31.5 million or 4.9% increase. Organic sales increased by 4.4% primarily due to VITAFUSION gummy vitamins, BATISTE dry shampoo and OXICLEAN additives while partially offset by a decline in KABOOM cleaners. Our ARM & HAMMER unit dose laundry detergent grew twice the unit dose category growth rate in the quarter and also increased share. This is a result of our bi-layer and dual chamber unit dose laundry detergent launches along with increased display support and distribution. Sales were strong in unmeasured channels, especially in club and online. In particular, online vitamin sales more than doubled versus last year. Volume growth contributed 3.9% to organic sales, while product mix and pricing added 0.5%. Four of the ten powerbrands gained share in the quarter.
Consumer International reported net sales were $136.4 million, a $5.5 million or 4.2% increase. Organic sales increased 7.4%, driven largely by higher sales in Australia, Mexico, Canada and the Export business. Volume increased 5.9%, while favorable product mix and pricing contributed 1.5%.
Specialty Products reported net sales were $71.2 million, a $6.7 million or an 8.6% decrease. Organic sales decreased by 7.7% as milk prices continue to hover at historical lows. The low prices are due to an excess global supply of milk and weak exports due to a strong dollar.
Gross margin increased 250 basis points to 46.5%. The gross margin increase was broad-based including higher volume, lower commodities, productivity programs, absence of vitamin start-up at the York manufacturing facility, lower promotional support, and the impact of the higher margin acquired business.
Marketing expense was $120.2 million, an increase of $4.4 million or 3.8%. Marketing expense as a percentage of net sales was consistent with prior year at 13.7%.
Selling, general, and administrative expense (SG&A) was $112.5 million or 12.8% of net sales, a 70 basis point decline on a reported basis primarily due to the 2015 pension settlement charge. On an adjusted basis, SG&A increased 30 basis points, primarily due to costs associated with the Toppik business.
Income from Operations on a reported basis was $175.3 million or 20.0% of net sales, a 320 basis point increase. On an adjusted basis, operating income increased 220 basis points.
The effective tax rate was 34.7%, compared to 38.3% last year. The Company now expects the full year effective tax rate to be approximately 35% (compared to previous outlook of 34.7%).
Operating Cash Flow
For the first six months of 2016, net cash from operating activities was $296.5 million; a $48.1 million increase from the prior year primarily due to higher cash earnings and a smaller increase in working capital. Capital expenditures for the first six months were $17.8 million, a $16.2 million decrease from the prior year when the company was completing the York vitamin plant.
At June 30, 2016, cash on hand was $210.8 million, while total debt was $1,082.3 million. The Company continues to have significant financial flexibility for acquisitions.
Regular Quarterly Dividend and Two-for-One Stock Split
On August 3, 2016, the Company’s Board of Directors approved a regular quarterly dividend of thirty-five and a half cents ($0.355) per share. Additionally, the Board approved a two-for-one stock split of the Company’s common stock, payable in the form of a stock dividend.
«We are pleased to report our 462nd consecutive quarterly dividend and our first stock split since 2011, said Mr. Farrell. The stock split recognizes our strong market performance. Additionally, we believe that the stock split will make our stock more attractive to a broader investor base.»
The quarterly cash dividend and the stock dividend will both be payable on September 1, 2016 to stockholders of record at the close of business on August 15, 2016. In addition to the quarterly cash dividend on a pre-split basis, stockholders will receive one additional share of common stock for each share of common stock they own.
The New York Stock Exchange is expected to begin reporting the adjusted number of shares outstanding and the split-adjusted per-share stock price on September 2, 2016. The split will increase Church & Dwight’s total shares outstanding from approximately 129 million shares to approximately 258 million shares.
2016 New Products
Mr. Farrell commented, “Innovation continues to be a big driver of our success. In support of our long term strategy to drive revenue and earnings growth, we have launched innovative new products while continuing to support prior year launches. One specific example is our new ARM & HAMMER bi-layer and dual chamber unit dose laundry detergents which, despite aggressive competition, grew twice the unit dose category growth rate and increased share in the second quarter. Additional launches include ARM & HAMMER CLUMP & SEAL MICROGUARD clumping cat litter, an entirely new beauty line of adult vitamins under the VITAFUSION brand, a new GROOVE condom and new RIVIERA lubricant each under the TROJAN brand and PREGNANCY PRO, the only pregnancy test kit with bluetooth technology, under the FIRST RESPONSE brand. We also have new offerings and distribution of the BATISTE dry shampoo brand which continues to grow its #1 global share position.”
Outlook for 2016
Mr. Farrell stated, “We have had excellent first half 2016 results. We are positioned to continue to deliver strong sales and earnings growth with our balanced portfolio of value and premium products, the launch of innovative new products, aggressive productivity programs and tight management of overhead costs. Although the business environment continues to be challenging, we are confident in achieving our 2016 business targets.”
With regard to 2016, Mr. Farrell said, “We continue to expect reported and organic sales growth of approximately 3-4% supported by our new product introductions in our core business and improved category growth. We now expect gross margin to expand by approximately 110 basis points (75 basis points previously) due to continued lower commodity costs and greater distribution efficiencies. In order to increase second half trial on new products and enter 2017 with strong momentum, we will be making incremental investments in trade and couponing in the second half. We are increasing our marketing investment spending to approximately 12.4% of sales, a 10 basis point increase over 2015. SG&A, adjusted for the 2015 pension settlement charge, is now forecasted to increase by 40 basis points (25 basis points previously) as a percentage of sales. The 15 basis point increase is primarily due to higher medical costs and incentive compensation. We now expect to achieve approximately 60 basis points of operating margin expansion.”
Mr. Farrell said, “We believe that 2016 will be an exciting year for Church & Dwight (CHD) based on our current momentum and category strength, success of our innovations, and confidence in gross margin expansion. We now expect 14 to 15% reported and 8 to 9% adjusted EPS growth as we increase our investments in marketing and promotions. The 2016 EPS outlook also reflects a higher effective tax rate. This outlook is top tier within the consumer packaged goods industry.
For the third quarter, we expect reported and organic sales growth of approximately 1-2% behind stronger promotions and a more difficult year over year comparison for the International division. We expect marketing as a percentage of revenue to increase in both dollars and as a percentage of sales as we begin to spend back our gross margin expansion. Reported EPS is expected to be $0.92 which equates to a 2% increase over the prior quarter which reflects the step up in marketing, promotional activities, and a slightly higher SG&A due to incentive compensation and a higher tax rate.”
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